RomaniaWinners and Losers: The Impact of Reform of Intergovernmental Transfers

ROMANIA WINNERS AND LOSERS: THE IMPACT OF REFORM OF INTERGOVERNMENTAL TRANSFERS Prepared for East European Regional Housing Sector Assistance ProjectProject 180-0034 U.S. Agency for International Development, ENI/DG/LGUD Contract No. EPE-C-00-95-001100-00, RFS No. 811 Prepared by Clare Romanik Pena Coman Daniel Daianu Hernando Garzon THE URBAN INSTITUTE 2100 M Street, NW Washington, DC 20037 (202) 833-7200 www.urban.org October 1999 UI Project 06610-811 TABLE OF CONTENTS EXECUTIVE SUMMARY.................................................................................................iii Purpose .....................................................................................................................iii What Happened in 1999?..........................................................................................iii Recommendations..................................................................................................... v Conclusions ...............................................................................................................vi PART I: BACKGROUND CHAPTER 1: MACROECONOMIC DEVELOPMENTS.................................................. 1 1.1 An Overall View ................................................................................................. 1 1.2 The Execution of the Budget and Local Governments....................................... 2 CHAPTER 2: REVENUES, EXPENDITURES AND LOCAL FISCAL AUTONOMY IN ROMANIA ................................................................................................................... 3 2.1 The Law on Local Public Finance ...................................................................... 3 2.2 Expenditure Responsibilities of Local Governments .......................................... 4 2.3 Revenue Sources of Local Governments .......................................................... 5 PART II: ANALYSIS OF INTERGOVERNMENTAL FISCAL RELATIONS CHAPTER 3: THE VERTICAL BALANCE .................................................................... 11 3.1 Changes in Local Government Expenditure Responsibilities........................... 11 3.2 Changes in Local Government Revenues....................................................... 13 CHAPTER 4: EVALUATION OF ROMANIA’S REVENUE SHARING SYSTEM .......... 15 4.1 Normative and Empirical Review of the System .............................................. 16 4.2 What Happened in 1999? ................................................................................ 18 CHAPTER 5: EVALUATION OF ROMANIA’S EQUALIZATION GRANT SYSTEM ..... 21 5.1 Description of the Current System................................................................... 22 5.2 Normative and Empirical Evaluation of the System ......................................... 23 PART III: POLICY OPTIONS AND RECOMMENDATIONS CHAPTER 6: SIMULATIONS OF ALTERNATIVE POLICY OPTIONS ........................ 27 6.1 Methodology .................................................................................................... 27 6.2 Conclusions..................................................................................................... 28 East European Regional ii Housing Sector Assistance Project CHAPTER 7: RECOMMENDATIONS .......................................................................... 31 7.1 Recommendation #1: Make the Revenue Sharing System More Equitable.... 31 7.2 Recommendation #2: Improve Targeting of Equalization Grants.................... 32 7.3 Recommendation #3: Make the Revenue Shares and Equalization Grant Funds Predictable by Setting the Wage Tax Share to Judet Councils and Local Councils and Stabilizing the Pool of Funds for Equalization Grants ....... 32 7.4 Recommendation #4: Introduce Enforcement Methods for Ensuring That County Councils Distribute Equalization Grants According to Published Criteria .............................................................................................................33 7.5 Recommendation #5: Create a Regional Assistance Program to Address the Causes of Poor Fiscal Capacity ................................................................. 33 7.6 Recommendation #6: Delineate Between National, County, and Local Services and Tie Payments to Benefits Received ........................................... 34 ANNEXES ANNEX I: INTERGOVERNMENTAL FINANCE: CONCEPTUAL FRAMEWORK..... 35 ANNEX II: MACROECONOMIC DATA....................................................................... 41 ANNEX III: CHANGES IN LOCAL EXPENDITURES AND REVENUES..................... 43 ANNEX IV: CHANGES IN THE HORIZONTAL BALANCE.......................................... 47 ANNEX V: ANALYSIS OF EQUALIZATION GRANT RECIPIENTS ........................... 53 ANNEX VI: LESSONS IN DESIGNING FISCAL T